A Primer on the Building Economics of Climate Change

Norway is exposed to a harsh climate and many facets of Norwegian society are, and will continue to be, affected by both climatic events and future climatic changes. The Intergovernmental Panel on Climate Change (IPCC) concludes that anthropogenic climate change is likely to persist for many centuries. Natural disasters caused by extreme weather events, avalanches, storm surges or landslides are among the key challenges confronting Norway. Functionality of the existing built environment and the design of future buildings are likely to be altered due to possible impacts of climate change. Many parts of buildingsÌ external enclosures are likely to be subject to faster degradation. We pose the question of how the optimal operating of buildings will be affected by climate change risk factors. A microeconomic toolbox for analyses of the behaviour of building owners is developed. A building is a very Ïlong lastingó durable asset that over time is changed due to exogenously imposed strains and by actions. We analyse how buildings will be affected by climate change within a dynamic analytical framework that explicitly allows for changes in the information sets over time. The building stock some time into the future consists of the building stock of today and of the new construction of the future. Parts of the present building stock will in the future be adapted to changes in the environment, while parts are kept as is. Analysis of how the building stock is affected by climate change should handle this diversity. An analysis of the building economics of climate change should not confine it self to addressing the questions of how new construction is and ought to be affected. At the other hand the analysis should not be confined to investigations of how the existing building stock, without any adaptations taking place, are affected by changed occurrence of climate related strains. The paper shows how this can be handled through the use of a putty-clay model. Uncertainty of which climate regimes that will prevail in the future enhances the profitability of actions that increases the scope for future decisions. Hence the paper can also be said to belong to the real options approach to building economics.